LTRO Payments On the Rise: Good for Euro and Global Economy

LTRO Payments On the Rise: Good for Euro and Global Economy
Image via Flickr by AlphaTangoBravo / Adam Baker

The euro zone has long been using Long-term Refinancing Operations. In fact, LTROs have been around for years. But given the global economic downturn starting in late 2007 and the following euro crisis, the Central European Bank has relied on LTROs in a different way.

LTROs have enabled the EU central bank to lend money out at low rates to the numerous troubled banks in Europe. The central bank decided to do this in hopes of stimulating stronger investments in high-yield assets or to encourage continued lending to businesses and the public. Ultimately it’s an attempt to stimulate a weak economy. The US did similar, but the EU is in a much worse position compared to the US now in 2013.

Fortunately, there has been some recent news that looks positive for the EU and global economic stability. As Christopher Whittall and Gareth Gore report for the IFR, “European banks will repay €137.2bn to the European Central Bank this week” and this is seen “as yet another indicant of euro area funding markets starting to normalise.” This is certainly a good sign for the ever-confusing situation that is the EU economy.

More importantly, many of the repayments are likely to come from many of the Spanish and Italian banks which benefited from generous LTRO payments made by the central bank. This will most certainly improve perception and the strength of the European market.

While this news is far from indicating a return to normalcy, it does show a sign of improved stability. Stability often indicates growth as well, so CFOs and others involved in corporate finance should take this news into consideration, especially if they deal heavily in Europe.

When it comes to the euro zone, good news has been lacking, so this recent report has been well-received. The confusion and uncertainty in the euro zone economy could turn this situation worse by next week, or it might end up continuing to get better. Many are hoping that Europe can get its economic house in order however. Restoring global stability will open a lot of doors for CFOs to use the heavy cash reserves which US corporations are sitting on.